Telecom Infrastructure Installer Tries To Broaden Its Customer Base

• Amy Reeves
• On 5:57 pm EST, Monday January 26, 2009

Since most people expect this recession to be deeper and longer than the last one, survivors want to be sure that they learned the lessons of the tech crash.

MasTec (NYSE:MTZ - News) certainly intends to do better this time around. About three-quarters of its business comes from installing telecom infrastructure. So after its client base went south in 2001, MasTec endured four straight years of shrinking revenue and red ink along with a federal probe into its accounting practices.

Austin Shanfelter, who was promoted to chief executive shortly after the downturn started, made some drastic changes to turn the company around. Those included cutting head count by 35% and selling off some of the many buyouts and side businesses MasTec had taken on during the boom years.

The strategy worked. In April 2007, Shanfelter handed off a profitable and growing firm to the current CEO, Jose Mas.

Family Name

In doing so, he returned control of the Miami-area company to the family that gave it its name. Mas' father, Jorge Mas Canosa, formed the present firm out of a merger in 1994 and ran it until his death in 1997. The younger Mas has spent his life in the business, working with Shanfelter as executive vice president during the turnaround.

Although the finances were greatly improved, Mas still wanted to make some changes. For one thing, he wanted to diversify the customer base.

"DirecTV (NasdaqGS:DTV - News) has been a fantastic customer for us," Mas said. "But in the first quarter of '08, it was 47% of our revenue."

One way to branch out was to expand MasTec's main non-telecom business, utilities. Mas and his team saw the growth potential of alternative energy. So on Oct. 6, they cut a deal to buy Wanzek Construction, a leading contract builder of wind farms.

Initially, MasTec agreed to pay $200 million in cash and assume $15 million in debt. But in December, as frequently happens in these wild financial markets, the parties renegotiated. Eventually, MasTec paid only $50 million in cash and paid the rest with 7.5 million shares and a $55 million convertible note.

Analyst Liam Burke of Janney Montgomery Scott says this shows how much Wanzek wanted to be part of MasTec.

"When the deal was announced, everything was rolling over and MasTec's stock was below where it could have been," Burke said. "At a certain level, equity made sense. Wanzek took a lot of things on an earn-out basis, took stock, took a lot of equity in MasTec. All those things (made it) an accretive deal."

Wanzek also brings expertise in building natural-gas stations and treatment plants. Although prices are down, Mas also expects gas to figure in the U.S. quest for domestic energy sources.

"Short term, some projects have been put on hold because of energy prices," he said. "Long term, there's a commitment on behalf of this country that we're going to get away from foreign dependence, and really start building out those (resources) that we have."

In its core telecom business, MasTec is looking for growth sectors outside of satellite TV. A key sector is wireless, which MasTec recently expanded with its $17.5 million buyout of Nsoro in August.

Both the Wanzek and Nsoro buyouts also fulfill Mas' desire to provide end-to-end construction of these systems. Previously, much of MasTec's work went on the last leg -- the part connecting directly to homes or end users. Wanzek's wind farms and Nsoro's cell phone towers bring MasTec further upstream. Wanzek's natural-gas facilities add to MasTec's existing work in pipelines and electrical grids.

All this has helped shrink DirecTV's share of revenue to 30% in the most recent quarter, even though its business grew in absolute terms. Total revenue in the quarter grew 49% vs. the year before to $397.8 million, while profit doubled to 36 cents a share.

Meanwhile, in Washington, the new government's agenda seems almost designed with MasTec in mind. Green energy is in, as is upgrading the electrical grid and bringing wireless and broadband service to rural areas. The civil engineering plans may also boost MasTec's now-small business in water-system and bridge building.

"Probably more (through) luck than vision, we've really positioned ourselves in most of the areas being talked about in the stimulus package," Mas said.

Stimulus Help

FBR analyst Alex Rygiel says the stimulus package may also offset a potential weakness in MasTec's model. With homebuilding grinding nearly to a halt, fewer houses will be needing new phone and utility connections.

Analysts disagree on exactly how much the stimulus package will affect MasTec directly. But they are impressed with Mas' progress toward his stated goals.

"I think there were a couple detours," said analyst Burke. "But if you look at where MasTec is today, compared to where he said it would be when he took the reins, I think he's on track."

Rygiel says he isn't expecting more buyouts in the short term, which may slow down growth compared with the last few years. Analysts polled by Thomson Reuters estimate that MasTec's profit rose 43% last year to 96 cents a share.

The forecast this year is for 16% growth, slowing to single digits in the next two years before picking up steam again.

Buzz up!